Cost increases hurt Starbucks

It's becoming harder for the food and beverage industry to absorb higher prices for ingredients.

By Kim Peterson Sep 28, 2010 4:46PM

Coffee beansSome of Starbucks' (SBUX) key ingredients -- coffee, milk, chocolate and sugar -- are becoming more expensive worldwide, and that's taking a toll on the company's bottom line.

Arabica bean prices have risen steadily for the past two years and recently reached 13-year highs. Those are the milder beans favored by Starbucks and Green Mountain Coffee Roasters (GMCR) (see this chart for more).

The cost increases are so high that Starbucks said it can no longer absorb them. "The extreme nature of the cost increases has made it untenable for us to continue," the company said. As a result, Starbucks is raising the prices of its bigger and more complicated drinks.

Starbucks isn't alone. Peet's Coffee & Tea (PEET) also said it would raise prices as the price of green Arabica hit $1.8865 a pound for December delivery. Peet's drinks will go up by about 10 cents.

Folgers producer J.M. Smucker (SJM) is boosting its prices by about 9%. And Green Mountain, which makes the popular Keurig single-cup machines, is raising coffee prices by 10% to 15%.

OK, so the coffee industry is hurting. But it gets worse. Sugar is now at a seven-month high on concerns about severe weather in Brazil, the world's biggest producer. Drought there has brought the Amazon River to its lowest level in 47 years, Bloomberg reports.

The opposite is occurring in Australia and India, where wet weather and flooding are causing problems.


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Then there's the cocoa industry, which has been turned on its head by one London hedge fund that decided to go on a serious buying spree. The fund, Armajaro, has bought so many cocoa beans that prices shot to a 30-year high this summer.

Finally, there's increasing volatility in the dairy industry, as feed grain supplies get tighter. The industry has seen wide swings on commodity prices.

I'm frankly surprised that Starbucks was able to hold prices down to this point. No one wants to see a price increase in this economy, however, and Starbucks smartly decided to lower the price of some of its more popular drinks, such as its 12-ounce brewed coffee.

Starbucks investors should keep a sharp eye on commodity prices going forward; volatile global prices wreak havoc throughout the supply chain, all the way down to the final user.

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